Brookman v. Commissioner

MURRAY BROOKMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Brookman v. Commissioner Docket No. 95871. United States Board of Tax Appeals 41 B.T.A. 557; 1940 BTA LEXIS 1167; March 7, 1940, Promulgated *1167 Petitioner created a trust for his wife in accordance with the terms of a property settlement. Under the trust agreement the wife was to receive $425 a month, to be reduced to $225 a month if their son should cease to live with his mother or attain the age of 21. Petitioner was under no obligation to make up deficiencies in trust income. Shortly thereafter the parties were divorced. Before the taxable year petitioner's former wife remarried. During the taxable year the son ceased to live with his mother and the parties directed the trustee to reduce the monthly payments to the former wife to the sum of $225 a month. Held, the income of the trust paid the wife which was allocable to the support of the son is taxable to petitioner under the rule of Douglas v. Willcuts,296 U.S. 1. The remainer of the income is not taxable to petitioner. F. C. Hutchens, Esq., for the petitioner. John H. Pigg, Esq., for the respondent. VAN FOSSAN *557 This proceeding was brought for the redetermination of a deficiency in the income tax of the petitioner for the year 1934 in the sum of $336.06. An alleged overpayment in the sum of*1168 $41.47 is also involved. The only issue before the Board is whether or not the income from a trust created by petitioner for his former wife was taxable to petitioner in the year 1934. The parties filed a stipulation of facts, which was supplemented by oral testimony at the hearing. From the whole record we make the following findings of fact. FINDINGS OF FACT. Petitioner resides in San Francisco, California. In the year 1915, petitioner married Hazel A. Brookman in Milwaukee, Wisconsin. Until the spring of 1920 petitioner and his wife lived in Minneapolis, Minnesota. From that time until December 1927 they lived in Idaho. In December 1927 petitioner and his wife moved to San Francisco, California. They lived in San Francisco until sometime after March 27, 1929. On March 27, 1929, petitioner and his wife entered into an agreement "for the proper support" of the wife and "with respect to all their property rights of every kind and nature, whether separate or community, so that each of the said parties hereto shall hereafter have his or her estate free and independent from any claim of title *558 or interest therein by the other party, and also mutually*1169 to relinquish and release any and all interest of each in or to the property and estate of the other as well as any claim upon the other except as herein contained." The agreement provided that the wife should keep as her sole and separate estate all personal property held in her name at the time of the agreement, with the exception of a note for $3,000 signed by petitioner and payable to the wife, which was canceled and declared void by the terms of the agreement. It was further provided that all the furniture and household furnishings in the rented house in Palo Alto, California, occupied by the wife, should be her sole and separate property. Petitioner agreed to establish a trust for his wife, naming the Crocker First Federal Trust Co. trustee, whereby the wife would receive "out of the trust thereby created" the sum of $425 a month during her life, beginning April 1, 1929. The monthly payments were to be reduced to $225 a month if either of two events occurred: (1) If the wife should remarry and Murray E. Brookman, Jr., (born January 21, 1916) is not at that time being supported and maintained by her; (2) when Murray, Jr., reaches the age of 21 years, irrespective of whether*1170 or not petitioner's wife has remarried. The agreement of March 27, 1929, provided that petitioner deliver to his wife Oakley bonds of $5,000 par value, represented by certificate No. 840, issued in her name, to be held by her as her sole and separate property. Petitioner agreed to pay his wife the sum of $250 in order that the wife might replace certain personal property taken from the house of the parties by petitioner. Petitioner also agreed to assign and deliver to his wife the contract of sale of the former residence of the parties in Boise, Idaho, and all payments due thereunder in the amount of $3,000. In consideration of petitioner's promises under the agreement, his wife agreed that petitioner should have all community property of the parties not specifically described and assigned to the wife under the agreement and all his separate property, with the increases and additions thereto, as his separate estate. The agreement provided for the custody of the parties' daughter Dorothy, age 11, and their son Murray, Jr., age 12. The entire expenses of the support, maintenance, and education of each child was to be borne by the parent who had custody of the child, in*1171 accordance with the terms of the agreement. It was further provided that: * * * this agreement is made with the express intention of and for the purpose of settling forever all the rights between said husband and wife *559 in regard to their property and the property of either of them, whether community or separate, and it is agreed that neither will ever make any claim upon the other of any kind or nature whatsoever, dependent upon or growing out of the marriage relationship which now exists between them; and each of the parties hereto does hereby waive for himself and for herself all the rights which he or she may have as husband or wife in any property of the other during the lifetime of the parties hereto, except as herein provided, or at the death of either party hereto; and neither of the parties hereto shall at any time make any claim upon the property of the other; * * * It is understood and agreed that this agreement and property settlement, and the other provisions hereof, are made and accepted by each party in full satisfaction of the other party's obligation to contribute to his or her support. * * * It is further agreed by and between the parties hereto*1172 that as to all other property hereafter acquired by either of the parties hereto, either by accumulation or investment of the property herein set apart to each of the parties, or from the fruits of their own toil, or in any other way, that such property shall be the sole and separate property of the party acquiring the same, free from claims or interest or control or demands whatsoever of the other party. It is further agreed by and between the parties to this contract that neither shall be answerable for any debts or liabilities contracted by the other party for support or otherwise from and after the date of this agreement. And each of the parties hereto shall sell, convey, mortgage, or in any other way deal with or dispose of any of his or her property without the consent or knowledge of the other, and without the need that the other shall join in any such deed or instrument or disposition thereof. The division of property herein made and the provision for the support of the second party herein contained and the other provisions hereof shall be in full settlement of all claims and demands of every kind whatsoever by the one party against the other, and in the event either*1173 party shall sue the other for or obtain a divorce, or shall bring any other proceedings against the other, the provisions herein shall be in lieu of all alimony, allowance, awards, and all other claims or demands, and the court shall make no order or decree in respect thereto except as may be in conformity with the provisions hereof. All the property set aside to petitioner's wife under the property settlement, and other property involved in the settlement, was acquired during petitioner's residence in Idaho and California. All property was acquired by earnings, none being received by gift or inheritance. The property set aside to the wife by virtue of the property settlement was approximately one-half of all the property petitioner and his wife possessed at that time. On March 27, 1929, petitioner and his wife established a trust in accordance with the terms of the agreement of March 27, 1929. The Crocker First Federal Trust Co., a California corporation, was named trustee. *560 Petitioner and his wife transferred certain personal property to the trustee, to be held and devoted as follows: (a) Said Trustee shall pay to Hazel A. Brookman the sum of Four Hundred*1174 Twenty-five Dollars ($425.00) per month each and every month during her life, said payments to commence on the first day of the month following the date of this instrument. The said payments of Four Hundred Twenty-five Dollars ($425.00) per month shall be reduced to Two Hundred Twenty-five Dollars ($225.00) per month and continue thereafter during her life when either one of the following events shall happen: 1. If she remarries and Murray E. Brookman, Jr. (born January 21st, 1916) is not at that time being supported and maintained by her; 2. When Murray E. Brookman, Jr. reaches the age of twenty-one (21) years, irrespective of whether the second party has remarried or not. (b) The balance of said net income shall be paid to said Murray E. Brookman, and, in the event of his death prior to the termination of this trust, shall be paid to said Dorothy Brookman and Murray E. Brookman, Jr. in the same proportions as they are entitled to receive the corpus of said trust. ARTICLE II. Upon the death of the said Hazel A. Brookman the Trustee shall forthwith divide the corpus of the trust estates then in its hands into two (2) equal parts for the benefit of each of the Trustors' *1175 children, Dorothy Brookman (born October 7th, 1918) and Murray E. Brookman, Jr. (born January 21st, 1916), and shall administer said parts as follows: (a) The Trustee shall pay to or apply for the benefit of the said Murray E. Brookman, Jr., the net income from the share of the trust fund so held for him, as the same accrues, until he attains the age of thirty-five (35) years, at which time this trust shall terminate as to the said share held hereunder for his benefit, which share shall, forthwith, vest in him. In the event that the Trustors' said son shall have attained the age of thirty-five (35) years prior to the death of the said Hazel A. Brookman, then upon the death of said Hazel A. Brookman this trust shall terminate as to the share of the corpus of the trust property that would have been held hereunder for the benefit of the Trustors' said son, had he not then attained the age of thirty-five (35) years, which share shall, forthwith, vest in the Trustors' said son. In the event that the Trustors' said son shall predecease the said Hazel A. Brookman, or shall survive the said Hazel A. Brookman but die prior to attaining the age of thirty-five (35) years, then and in*1176 either of these events, upon the death of the said Hazel A. Brookman, the Trustors' said son being then deceased, or upon the Trustors' said son's death, the said Hazel A. Brookman being then deceased, this trust shall terminate as to the Trustors' said son's share and the corpus of the trust property then held hereunder, or that would have been held hereunder for the benefit of the Trustors' said son, as the case may be, shall vest, share and share alike, in the then living issue of the Trustors' said son; and should there be no such issue then living, it shall continue to be held hereunder for the benefit of the Trustors' said daughter and shall be held in all respects subject to the terms of and become a part of the trust fund herein created for the benefit of the Trustors' said daughter and the net income herefrom shall be paid to the Trustors' said daughter as long as she shall live; and should the Trustors' said daughter not then be alive it shall vest in the said Murray E. Brookman; and should the said Murray E. Brookman not then be alive, it shall *561 vest in the heirs at law of the said Murray E. Brookman (excluding, however, the said Hazel A. Brookman), in accordance*1177 with the laws of succession of the State of California then in force and effect. (b) The Trustee shall pay to or apply for the benefit of the said Dorothy Brookman the net income from the share of the trust fund so held for her, as the same accrues, as long as she shall live. * * * The trust instrument then provided that in the event of the death of the daughter before her mother or her decease after her mother, her interest should vest in her living issue but if she had no living issue, then it should vest in petitioner's son, provided that if the son had not attained 35 years of age the interest should be held subject to the trust created for the benefit of the son. In the event that the son should not be then alive, the interest would vest in petitioner or his heirs at law, excluding his wife, in accordance with the laws of succession of the State of California. The trust instrument gave the trustee power to sell any part of the corpus and to invest and reinvest the proceeds of such sale. The trustee was not restricted to securities legal for investment in trust funds under California law. The trustee was required to obtain consent of the petitioner and wife before*1178 selling or reinvesting any of the trust estate. If petitioner and his wife should disagree, the trustee was empowered to use its discretion in making sales and investments. It was further provided that: ARTICLE IV. This indenture and the trust hereby created may be revoked, in whole or in part, and any property held hereunder may be withdrawn herefrom, and any property acceptable to the Trustee may be added hereto, and any of the terms and provisions hereof may be altered and amended; provided, however, that such revocation, withdrawal, additions, alteration, or amendment shall be made while both Trustors are alive, or after the death of the said Hazel A. Brookman while the said Murray E. Brookman is alive, and the same to be effective only in the event that written notice is so given to the Trustee, signed by the said Murray E. Brookman and Hazel A. Brookman during the lifetime of both of them, or by the said Murray E. Brookman after the death of the said Hazel A. Brookman. * * * ARTICLE VI. Income accrued and/or undistributed at the time of the termination of any interest or estate hereunder, shall belong and go to the beneficiary or beneficiaries entitled to the*1179 next eventual estate in the same proportions as the principal thereof. The trust instrument provided that the beneficiaries might not assign or anticipate any beneficial interests under the trust. No *562 beneficial interest might vest in an assignee in insolvency nor in a trustee in bankruptcy, and no part thereof might be subject to attachment or execution levy. All stock dividends were to be treated as principal and added to the trust fund. Proceeds from the sale of stock rights were to be credited to principal. On July 8, 1929, Hazel A. Brookman obtained an absolute divorce from petitioner. The divorce decree stated: IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the agreement and property settlement dated March 27, 1929, between the parties hereto be ratified and approved, and they be and hereby are ordered and directed to perform the covenants thereof. At the time petitioner's wife obtained the divorce, petitioner was residing in California. Subsequent to July 8, 1929, and prior to January 1, 1934, petitioner's former wife remarried, becoming Hazel A. Leve. By a letter dated April 27, 1934, petitioner and his former wife notified the trustee that*1180 their son had ceased to be supported by his mother as of April 15, 1934, and since that date had been maintained by his father, who had agreed to support him. The letter directed the trustee to reduce the payments to Mrs. Leve to the sum of $225 per month, commencing May 1, 1934. Petitioner and his former wife agreed that should the son again make his residence with his mother at any time prior to his twenty-first birthday, with the consent of his parents, she would become entitled again to receive $425 per month in accordance with the terms of the trust instrument. During the year 1934 the trustee paid petitioner's former wife income from the trust in the sum of $2,683.23. Petitioner did not include this sum in gross income in his income tax return for the year 1934. In his determination of the deficiency involved, respondent, among other adjustments, increased petitioner's net income for the year 1934 by the amount of $2,682.23. OPINION. VAN FOSSAN: The single question for our determination is the taxability to petitioner of the income from a so-called alimony trust. Petitioner contends that he was under no continuing obligation to support his wife after the property*1181 settlement above described, and that the income from the trust created under the settlement is not taxable to him. He maintains that the ratification of the settlement in the divorce decree definitely settled the obligations of the parties, since the court did not reserve the right to award alimony in the *563 future. He asserts that, in any event, his wife's remarriage before the taxable year cut off any possible continuing obligation to support her. Finally, he urges that his former wife's interest in the trust was part of her community property estate and, hence, the income should be taxed to her and not to petitioner. Respondent, on the other hand, argues that the trust income was paid to petitioner's former wife in discharge of his legal obligation arising under the trust and property settlement agreements and as such was taxable to petitioner. He contends that, even if the entire trust income is not taxable to petitioner, amounts paid the former wife for maintenance and support of the son were includible in petitioner's gross income. Respondent relies upon *1182 Douglas v. Willcuts,296 U.S. 1, in his inclusion of the entire income of the trust in the year 1934 in petitioner's gross income. Since the date of hearing of the present case, the United States Supreme Court has handed down a decision in Helvering v. Fitch,309 U.S. 149. In holding that the taxpayer had not shown that he was outside the scope of Douglas v. Willcuts, supra, the Court said: Enough has been said to show that respondent has not sustained the burden of establishing that his case falls outside the general rule expressed in Douglas v. Willcuts, supra. If we were to conclude that this case is an exception to that rule we would be acting largely on conjecture as to Iowa law. That we can not do. For if such a result is to obtain, it must be bottomed on clear and convincing proof, and not on mere inferences and vague conjectures, that local law and the alimony trust have given the divorced husband a full discharge and leave no continuing obligation however contingent. Only in that event can income to the wife from an alimony trust be treated under the revenue acts the same as income accruing*1183 from property after a debtor has transferred that property to his creditor in full satisfaction of his obligation - unless of course Congress decides otherwise. Conforming to this holding, our first inquiry is, therefore, whether either the local law or the trust instrument imposed upon petitioner a continuing obligation to support his former wife. Both petitioner and his wife were residents of the State of California at the time of her remarriage and during the taxable year 1934. Thus, any legal obligation of the petitioner to support his former wife must be imposed by California law. Under that law, the duty of a man to support his former wife ceases upon her remarriage. California Civil Code, sec. 139, 1Tremper v. Tremper,39 Cal.App. 62. See Harry S. Blumenthal,34 B.T.A. 994; affirmed per curiam,91 Fed.(2d) 1009. It is apparent that if petitioner had *564 a continuing duty to support his former wife the obligation must arise from the contract or trust instrument itself. *1184 By its terms, the agreement of March 27, 1929, indicates that it contemplated the settlement of all matters of support, property rights and all other matters growing out of the marital status. In this agreement petitioner undertook to set up a trust "whereby said party of the second part [the wife], out of the trust thereby created, shall be paid the sum" of $425 per month for life in certain contingencies and the sum of $225 per month for life in all events. It is to be noted that the payment was "out of the trust thereby created." It was not an absolute commitment guaranteed by petitioner. He had no collateral or conditional obligation or duty to make up any deficiencies in the trust income. If the trust, either by earnings or invasion of corpus, supplied the stated amounts, the amounts would be paid to the divorced wife. If there were a deficiency, or if, by invasion, the corpus were reduced to nothing, petitioner had no obligation to supply the deficient amount. Neither the contract nor the trust placed a continuing obligation on petitioner. Thus it is that there was no continuing obligation of support resting on petitioner either by local law or by contract. Petitioner*1185 is not taxable on the trust income paid for the support of his divorced wife. Respondent contends, however, that the sum of $800 of the amounts paid to the former wife from January 1 to April 30, 1934, represents maintenance and support of a minor child and, hence, is taxable to petitioner under the rule of Douglas v. Willcuts, supra. Under the California law, a father is responsible for the maintenance and support of minor children. Blair v. Williams,86 Cal.App. 676; 261 Pac. 539; California Civil Code, sec. 196. Petitioner's former wife received only the sum of $2,682.23 during the taxable year. By a letter dated April 27, 1934, however, petitioner and his former wife directed the trustee to reduce the payments to the wife under the trust from $425 per month to $225 per month, beginning May 1, 1934. The occasion for the letter was petitioner's assumption of the maintenance and support of their son. Hence, it may be inferred that during those four months the sum of $425 per month was paid to the former wife. The sum of $200 per month was obviously allocated to the maintenance and support of the son. Since the sum of*1186 $800 paid petitioner's former wife for the support of his son relieved petitioner from his obligation to maintain and support the son pro tanto, the sum of $800 is includible in petitioner's gross income for the year 1934. Respondent admitted in his answer that petitioner made on overpayment in the sum of $41.47. This will be disposed of under Rule 50. decision will be entered under Rule 50. Footnotes 1. Remarriage.↩ Upon the remarriage of the wife, the husband shall no longer be obligated to provide for her support but such remarriage shall not affect his duty to provide for the maintenance of the children of his marriage.